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DEFINITION OF ACCOUNTING
a. A service activity. Its function is to provide quantitative information, primarily financial in nature, about
economic entities that is intended to be useful in making economic decisions.
b. A process of identifying, measuring, and communicating economic information to permit informed judgments
and decisions by users of the information.
c. Art of recording, classifying, and summarizing in a significant manner and in terms of money, transactions
and events which are, in part at least, of a financial character, and interpreting the results thereof.
b. Principles
1. Measurement/Cost Principle/Historical Cost – Acquired assets should be recorded at their actual cost.
2. Revenue recognition principle – Revenue is to be recognized in the accounting period when goods are
delivered or services are rendered or performed, not when cash is collected.
3. Expense recognition principle/Matching principle - Expenses should be recognized in the accounting
period in which goods and services are used up to produce revenue not when the entity pays for the goods or
services.
4. Full disclosure- Requires that all relevant (not all) information that would affect the user’s understanding
be disclosed in the financial statements.
5. Other principles:
Objectivity principle – Accounting records and statements are based on the most reliable data available.
Accounting records are based on information that flows from activities documented by objective evidence.
Consistency principle - Firms should use the same accounting method from period to period to achieve
comparability.
c. Assumptions
1. Going concern – Accounting information reflects presumption that the business will continue operating
instead of being closed or sold.
2. Monetary unit – We can express transactions and events in monetary units.
3. Time period – Life of a company can be divided into time periods, e.g. monthly, annually.
4. Business entity – A business is accounted for separately from other business, including its owner.
d. Constraints
1. Materiality – prescribes that only information that influences decisions need be disclosed.
2. Benefit exceeds cost – prescribes that only information with benefits of disclosure greater than the costs
of providing it need be disclosed.
4. BUSINESS ENTITIES
a. Sole proprietorship – a business owned by one person and accounted for separately.
b. Partnership – a business owned and operated by two or more persons who bind themselves to contribute
money, property or industry to a common fund, with intention of dividing profits among themselves.
c. Corporation – A business owned by its stockholders. An artificial being created by operation of law, having
rights of successions and powers authorized by law.
a. ASSETS – Resources controlled by the enterprise as a result of past events from which future benefits are
expected to flow to the enterprise.
CURRENT ASSETS:
CASH
SUPPLIES
ACCOUNTS RECEIVABLE
NOTES RECEIVABLE
MERCHANDISE INVENTORIES
*PREPAID EXPENSES - costs that have been paid but are not yet used up or have not yet expired.
*ACCRUED REVENUES – revenues rendered but not yet collected
NON-CURRENT ASSETS:
PROPERTY PLANT AND EQUIPMENT (Land, Equipment, Machineries)
INTANGIBLE ASSETS
b. LIABILITY – Present obligation of the enterprise to outside parties arising from past events, settlement of which
is expected to result to an outflow from the enterprise.
-Claims of the creditors from the assets of the company.
CURRENT LIABILITIES:
ACCOUNTS PAYABLE
NOTES PAYABLE
*ACCRUED EXPENSES – expenses incurred but not yet paid
*UNEARNED REVENUES – money received from a customer for work that has not yet been performed.
NON-CURRENT LIABILITIES:
MORTGAGE PAYABLE
BONDS PAYABLE
c. CAPITAL/OWNER’S EQUITY/NET ASSETS – Residual interest in the assets of the enterprise after deducting
all its liabilities.
-Claims of the owners from the assets of the company
6. ACCOUNTING EQUATION
Assets=Liabilities + Capital
7. DOUBLE-ENTRY SYSTEM
*CAPITAL COMPOSITION:
8. ACCOUNTING CYCLE
1. IDENTIFY BUSINESS EVENTS TO BE RECORDED (Gather information through source documents)
2. ANALYZE THE GIVEN TRANSACTION (Increase or decrease in an account)
3. JOURNALIZE THE TRANSACTIONS in the General Journal (Book of Original entry)
4. POSTING THE JOURNAL ENTRIES in the General Ledger/T-account (Book of Final entry)
5. PREPARATION OF UNADJUSTED TRIAL BALANCE to verify the equality of debits and credits
DR CR
ASSETS:
OFFICE EQUIPMENT 500
CASH 500
LIABILITIES
CAPITAL
OWNER'S DRAWING
REVENUES
CAPITAL
TOTAL 500 500
a Gross Sales xx
Sales Discount (xx)
Sales Returns (xx)
Net Sales xx
c Gross purchases xx
Purchase Discount (xx)
Purchase Returns (xx)
Freight-in xx
Net Purchases xx
d Administrative expenses xx
Selling expenses (e.g. freight-out) xx
Other expenses xx
1. TERMS OF TRANSACTIONS
Credit period - Merchandise may be purchased and sold either on cash or on credit terms. When goods are sold on
account, a credit period is allowed for payment.
Cash discounts – Encourages prompt payment. Purchase discount for the buyer’s perspective, Sales discount for
the seller’s perspective. It decreases the cash payment/collection.
2/10 – Customer can avail 2% discount if paid for within 10 days (discount period)
Trade discounts – Encourages buyers to purchase products because of the markdown from the list price.
Ex. Merchandise inventory with a list price of 100,000 terms of 3/10, n/eom and trade discounts of 10%, 15%
Note: Gross invoice price is the amount to be recorded in the Sales/Purchase not the list price
2. TRANSPORTATION COSTS / FREIGHT – Cost of shipping goods from one place to another
FOB Shipping Point (Origin/Seller)
Freight-In account is debited by the buyer
The buyer should pay the forwarder
FOB Destination (Buyer)
Freight-Out is recorded by the seller
It is the seller who should pay the forwarder.
Collect
The buyer pays the forwarder. The buyer credits the CASH for the freight transactions
Prepaid
The seller pays the forwarder. The seller credits the CASH for the freight transactions
JOURNAL ENTRIES
3. NORMAL BALANCES
4. INVENTORY SYSTEMS – systems available (Perpetual or Periodic) to merchandising entities to record events
related to merchandise inventory.
PERIODIC PERPETUAL
10,000.0 10,000.0
1 Accounts receivable 0 Accounts receivable 0
10,000.0 10,000.0
Sales 0 Sales 0
Cost of goods sold 8,000.00
Inventory 8,000.00
Sales returns and Sales returns and
2 allowances 500 allowances 500
Accounts receivable 500 Accounts receivable 500
Inventory 400
Cost of goods sold 400
3 Cash 9,310.00 Cash 9,310.00
Sales discount 190 Sales discount 190
Accounts receivable 9,500.00 Accounts receivable 9,500.00
Discount (10,000- Discount (10,000-
500x.02) 500x.02)
4 Purchases 6000 Inventory 6000
Accounts payable 6000 Accounts payable 6000
5 Accounts payable 300 Accounts payable 300
Purchase returns 300 Inventory 300
6 Accounts payable 5700 Accounts payable 5700
Purchase discounts 114 Inventory 114
Cash 5586 Cash 5586
Discount (6,000- Discount (6,000-
300x.02) 300x.02)
6. SPECIAL JOURNALS – used to record and post similar type of transactions for efficiency and division of labor.
GENERAL JOURNAL – used to record all transactions not found in the special journals (e.g. adjusting, closing,
correcting entries, Sales returns on account and Purchase returns on account)
SUBSIDIARY LEDGERS – a list of individual accounts with common characteristics. Contains detailed information on
specific accounts on general ledger.
Examples:
Accounts receivable ledger – stores transaction data of individual customers
Accounts payable ledger – stores transaction data of individual suppliers
SAMPLE QUESTIONS:
1. GAAP stands for Generally Accepted Accounting Principles which encompasses the conventions, rules and
procedures necessary to define what accepted accounting practice is. They are called generally accepted because
A. They are like laws that must be followed in financial reporting
B. They are developed through votes and conferences
C. They are from established laws which are irrevocable and cannot be changed
D. Because they become accepted by agreement rather than by formal deviation from a set of postulates and basic
concepts
ANSWER: D
2. It encompasses the process of analyzing, classifying, summarizing and communicating all transactions involving
the receipt and disposition of government funds and property and interpreting the results thereof
A. Private accounting
B. Public Accounting
C. Government accounting
D. Managerial accounting
ANSWER: C
3. It is the area of accounting that emphasizes developing accounting information for use within an entity
A. Managerial accounting
B. Financial accounting
C. Public accounting
D. Private accounting
ANSWER: A
5. An accountant, should treat an entity as continuing in operation indefinitely in the absence of evidence to the
contrary. This accounting assumption is
A. Monetary unit
B. Time period
C. Accounting entity
D. Going concern
ANSWER: D
7. Which of the following is the correct sequence for the accounting cycle?
A. Analyzing, posting, journalizing, preparing unadjusted trial balance and determining adjusting entries.
B. Journalizing, posting, analyzing, preparing unadjusted trial balance and determining adjusting entries.
C. Analyzing, journalizing, posting, determining adjusting entries and preparing unadjusted trial balance
D. Analyzing, journalizing, posting, preparing unadjusted trial balance and determining adjusting entries.
ANSWER: D
10. If a value of P52, 300 was received from customer for services rendered by employees, the entry would
A. Increase assets amounting to P52, 300, and increase liability for half the amount.
B. Increase assets amounting to P52, 300, and increase equity for half the amount.
C. Increase assets amounting to P52, 300, and increase liability for the same amount.
D. Increase assets amounting to P52, 300, and increase equity for the same amount.
ANSWER: D
13. This is a device used periodically to test the equality of debits and credits
A. Chart of accounts
B. Accounts
C. Trial Balance
D. Financial Statement
ANSWER: C
14. A transaction that debits or credits more than two accounts at the same time requires a
A. Single entry
B. Compound entry
C. Posting entry
D. Adjusting entry
ANSWER: B
16. Which of the following would be reported on the statement of Owner’s equity for the current year?
A. Sales
B. Additional investment for the current year
C. Cost of goods sold
D. Inventory
ANSWER: B
18. Which of the following application of the rules of debit and credit is true?
A. Decrease equipment with a credit and the normal balance is a credit
B. Increase accounts payable with a credit and the normal balance is a debit
C. Increase expense with a debit and the normal balance is debit
D. Decrease cash with a debit and the normal balance is credit
ANSWER: C
20. Financial statements include a statement of financial position, a statement of comprehensive income, a statement
of changes in equity and a statement of cash flows. Which of the following is also included as a component of
financial statements?
A. A statement of retained earnings
B. Accounting policies
C. An auditor’s report
D. A director’s report
ANSWER: B
21. Which accounting principle is being observed when an accountant charges to expense a cost that contributed to
revenue during a period?
A. Revenue realization
B. Matching
C. Monetary unit
D. Conservatism
ANSWER: B
22. Which of the following does not apply to the recognition of revenue for transactions involving the rendering of
services
A. The amount of revenue and the costs incurred and costs to complete can be measured reliably
B. It is probable that payment for the services shall be received by the entity
C. The significant risks and rewards of ownership have been transferred to the buyer
D. The stage of completion of the transaction at the end of reporting period can be measured reliably
ANSWER: C
25. An item would be considered material and therefore would be disclosed in the financial statements if
A. The expected benefits of disclosure exceed the additional costs
B. The impact on earnings is greater than 10%
C. The standard definition of materiality is met
D. The omission or misstatement of the amount would make a difference to the users.
ANSWER: D
27. The primary focus of financial reporting has been on meeting the need of which of the following groups?
A. Managers of an entity
B. Existing and potential investors, lenders and other creditors
C. National and local taxing authorities
D. Independent CPAs
ANSWER: B
31. The following are accounts taken from the books of Tiger Advertising Agency.
Cash P725, 000
Accounts receivable P40, 000
Notes receivable P10, 000
Prepaid rent P24, 000
Office Equipment P44, 000
Furniture and Fixtures P34, 000
Supplies P4, 200
Accounts Payable P263, 000
Notes payable P17, 000
32. First statement: If total assets decreased by P40, 000 during a specific period and owner’s equity decreased by
P45, 000 during the same period the period’s change in total liabilities was an P85, 000 increase.
Second statement: If net income for a business was P175, 000, withdrawals were P40, 000 in cash, and the owner
made no investment, and the owner’s equity increased P215, 000
A. First statement is true, second is false
B. First statement is false, second is true
C. Both statements are true
D. Both statements are false
ANSWER: D
33. Transposition is an
A. Error of interchanging the figures
B. Error of placing the decimal point
C. Error of not recording the transaction
D. Error, which if not detected, is automatically compensated or corrected in the next accounting period
ANSWER: A
35. What is the correct amount of assets, liabilities and owner’s equity respectively?
A. P131, 000, P55, 000, P76, 000
B. P123, 500, P55, 000, P68, 500
C. P146, 000, P55, 000, P91, 000
D. P138, 500, P55, 000, P83, 500
ANSWER: B
36. The following financial information is known about five unrelated businesses:
COMPANY
A B C D E
12/31/2012
Assets P350, 000 P390, 000 P460, 000 P290, 000 P630, 000
Liabilities P270, 000 P300, 000 P300, 000 P200, 000 ?
12/31/2013
Assets P370, 000 P480, 000 P750, 000 ? P880, 000
Liabilities P238, 000 ? P360, 000 P270, 000 P400, 000
During 2013
Addl investment P46, 000 P70, 000 ? P230, 000 0
Net income ? P60, 000 P200, 000 P100, 000 P230, 000
Drawings P20, 000 P26, 000 P40, 000 P50, 000 P70, 000
What would be the correct amount of net income of Company A for the year 2013?
A. P80, 000
B. P132, 000
C. P241, 000
D. P26, 000
ANSWER: D
37. Referring to data from number 2, what would be the correct amount of liabilities as of December 31, 2013 of
Company B?
A. P90, 000
B. P194, 000
C. P286, 000
D. P674, 000
ANSWER: C
38. Referring to data from number 2, what would be the correct amount of additional investment during the year 2013
of Company C?
A. P70, 000
B. P160, 000
C. P390, 000
D. P710, 000
ANSWER: A
39. On January 8, 2014, Tyrion Company decided to purchase additional 20 machineries for his growing business.
The total of the purchased machineries amounts to P1, 350, 000. It was agreed that Tyrion should pay in full the
machineries except for the 3 machineries which the seller agreed to be paid in half and the remaining balance be
paid next month. What would be the acceptable journal entry on January 8, 2014?
A. Machineries P1, 350, 000
Accounts Payable P202, 500
Cash P1, 147, 500
B. Machineries P1, 147, 500
Accounts Payable P202, 500
Cash P945, 000
40. When Leonardo Bucaycay started a business, he invested P15, 000 cash plus some land that had a fair market
value of P23, 000. Also the business assumed responsibility for note payable for P18, 000 that was issued to finance
the purchase of the land. In recording Bucaycay’s investment, the entry will consist of
A. One debit and one credit
B. Two debits and one credit
C. Two debits and two credits
D. Debits that total P38, 000 and credits that total P33, 000
ANSWER: C
41. Sexy Services pays a monthly fixed salary expense of P25, 000. Its supplies expense is P5 for every P100 of
services rendered. Total supplies expense for the period is P2, 000. Sexy’s operating income is
A. P15, 000
B. P13, 000
C. P38, 000
D. P40, 000
ANSWER: B
42. The net asset of Y was P125, 000. An account payable of P11, 700 was paid. What is the new balance of Y’s net
assets?
A. P136, 700
B. P113, 300
C. P125, 000
D. P101, 600
ANSWER: C
43. The total assets of X firm is P350, 000 of which P50, 000 is accounts receivable. Subsequently, P22, 500 of
accounts receivable was collected. What is the new balance of its total assets?
A. P337, 500
B. P322, 500
C. P350, 000
D. P400, 000
ANSWER: C
45. The cost of service is 60% of service income. If the service income is P750, 000, what is the gross profit?
A. P300, 000
B. P450, 000
C. P150, 000
D. None of the choices
ANSWER: A
46. John, the accountant of XYZ Tutoring Services failed to recognize the following:
Utilities expense of P2, 530
Service fee earned but not yet received P5, 100
Supplies consumption of P1, 550
Payment of fire insurance for the next accounting period P1, 200
Owner’s additional investment of P3, 000
What would be the effect of the above omissions in the net income of the company?
A. Overstatement by P180
B. Overstatement by P3, 000
C. Understatement by P1, 020
D. Overstatement by P1, 020
ANSWER: C
47. If the debit and credit totals of a trial balance were P95, 000 and an additional entry for the purchase of office
supplies for cash worth P4, 000 was recorded and posted, what would be the new debit and credit totals of the trial
balance after this entry is made?
A. P91, 000
B. P99, 000
C. P87, 000
D. P95, 000
ANSWER: D
48. The statement of financial position of Humps Company shows a capital balance of P360, 000 which is equal to
1/3 of its total assets. How much is the total liabilities?
A. P720, 000
B. P120, 000
C. P480, 000
D. P1, 080, 000
ANSWER: A
49. At the beginning of the year, the total assets of Beetle Computer Shop is P220, 000 and total capital of P180,
000. During the year, Beetle Computer Shop recorded total revenues of P300, 000; paid expenses of P180, 000;
purchase additional computers for cash P25, 000; paid accounts to suppliers P30, 000 but purchased additional set
of computer on account before year-end for P40, 000. What are the balances of Assets, Liabilities and Capital at the
end of the year?
Assets Liabilities Capital
A. P350, 000 P50, 000 P300, 000
B. P340, 000 P40, 000 P300, 000
C. P230, 000 P10, 000 P220, 000
D. P350, 000 P10, 000 P340, 000
ANSWER: A
50. Mars, owner of the Pint Company, rendered professional service to a client at a total fee of P75, 000. He received
cash of P25, 000 and a 45-day promissory note for the balance. What would be the effect of this transaction in the
owner’s capital and liability account?
A. Increase capital by P75, 000; increase liability by P50, 000
B. Increase capital by P25, 000; increase liability by P50, 000
C. Increase capital by P25, 000; no effect in liability
D. Increase capital by P75, 000; no effect in liability
ANSWER: D
53. Referring the data in number 52, what would be the increase in owner’s equity as of April 30 assuming that the
requested service has already been rendered in April 29?
a. P135, 000
b. P75, 000
c. P60, 000
d. No increase
ANSWER: A
54. The information below is taken from the records of the Lanister Enterprise:
Salary Expense P175, 000 Lanister, Drawings P45, 000
Rent Expense P50, 000 Utilities Expense P85, 000
Consulting fees P505, 000 Prepaid Supplies P55, 000
What is the correct amount of the net income?
A. P195, 000
B. P140, 000
C. P95, 000
D. P280, 000
ANSWER: A
55. If the residual interest of Grand Service Company is P180, 000 which is 2/3 of the total economic resources, what
would be the amount of its economic obligation?
A. P270, 000
B. P90, 000
C. P450, 000
D. P180, 000
ANSWER: B
56. The information below is taken from the books of Mr. Joey Lao for the year ended December 31, 2015.
January 1 December 31
Assets P200, 000 P300, 000
Liabilities P80, 000 P120, 000
Joey Lao made an additional investment of P40, 000 during the year. Net income and expenses during the year
amounted to P180, 000 and P80, 000 respectively. Determine the amount of withdrawals during the year.
A. P180, 000
B. P120, 000
C. P80, 000
D. P160, 000
ANSWER: D
57. The following are accounts taken from the books of Tiger Advertising Agency.
Cash P725, 000
Accounts receivable P40, 000
Notes receivable P10, 000
Prepaid rent P24, 000
Office Equipment P44, 000
Furniture and Fixtures P34, 000
Supplies P4, 200
Accounts Payable P263, 000
Notes payable P17, 000
How much is the current asset of the company?
A. P779, 200
B. P793, 200
C. P799, 000
D. P803, 200
ANSWER: D
58. Based on the data from number 57, how much is the owner's equity of the company?
A. P577, 200
B. P1, 161, 200
C. P501, 200
D. P601, 200
ANSWER: D
59. Jimmy's Car Repair Shop started the year with total assets of P90, 000 and total liabilities of P60, 000. During the
year, the business recorded P150, 000 in car repair revenue, P85, 000 in expenses, and Jimmy withdrew P15, 000.
Jimmy's capital balance at the end of the year was
A. P80, 000
B. P75, 000
C. P95, 000
D. P65, 000
ANSWER: A
60. Use the data from number 59. The profit reported by Jimmy's Car Repair Shop for the year was
A. P50, 000
B. P65, 000
C. P30, 000
D. P135, 000
ANSWER: B
61. Use data from number 59. Jimmy's capital balance changed by what amount from the beginning of the year to the
end of the year?
A. P15, 000
B. P65, 000
C. P30, 000
D. P50, 000
ANSWER: D
63. Noland Company purchases equipment for P1,200 and supplies for P400 from Sanders Co for P1,600 cash. The
entry for this transaction will include a
A. debit to Equipment P1,200 and a debit to Supplies Expense P400 for Sanders.
B. credit to Cash for Sanders.
C. credit to Accounts Payable for Noland.
D. debit to Equipment P1,200 and a debit to Supplies (asset) P400 for Noland.
ANSWER: D
64. If capital is 4 times as much as total liabilities which is in turn 20% of assets totaling P520, 000, how much is
capital?
A. P416, 000
B. P420, 000
C. P140, 000
D. P520, 000
ANSWER: A
65. Assets at the beginning of the year amounted to P72, 000 while liabilities were on 1/3 of this figure. By the end of
the year, assets increased to 150% while liabilities decreased by 25%. If the owner made withdrawals of P9, 000,
additional investments of P20, 000 while revenues generated totaled P75, 000. What was the amount of total
expenses incurred by the business during the year?
A. P54, 000
B. P64, 000
C. P44, 000
D. P34, 000
ANSWER: C
66.First statement: If total assets decreased by P40, 000 during a specific period and owner’s equity decreased by
P45, 000 during the same period the period’s change in total liabilities was an P85, 000 increase.
Second statement: If net income for a business was P175, 000, withdrawals were P40, 000 in cash, and the owner
made no investment, and the owner’s equity increased P215, 000
A. First statement is true, second is false
B. First statement is false, second is true
C. Both statements are true
D. Both statements are false
ANSWER: D
67. Aloe Vera Company has P5, 000, 000 in total assets as of the beginning of the year. At the time, creditors have a
70% claim on the total assets of the company. By the end of the year, liabilities have increased by P100, 000 and
creditors only had a 60% claim on total assets. Assuming that there were no additional investments and withdrawals
made by the owners, how much was Aloe Vera’s net income / (net loss) for the year?
A. P(350, 000)
B. P900, 000
C. P500, 000
D. P1, 000, 000
ANSWER: B
68. Refer to number 33, how much was Aloe Vera’s total assets as of the end of the year?
A. P1, 750, 000
B. P3, 500, 000
C. P2, 400, 000
D. P6, 000, 000
ANSWER: D
69. Refer to number 33, how much was total equity as of the beginning of the year?
A. P1, 400, 000
B. P1, 000, 000
C. P600, 000
D. P1, 500, 000
ANSWER: D
70. Small Co. buys appliances and resale it at a profit and uses periodic inventory. At the beginning of the operation,
Small bought 50 units of electric fans at P1,250 each and received a trade discount of 3% and 4%. Small credited
cash for the full amount of purchased. At a subsequent date of purchase, Small returned 5 defective units to the seller
and received a cash refund for the original cost. Small sold 20 units of electric fan for a total gross profit of P2,350.
Merchandising Business_A_M
1. Small Co. should record in its book a trade discount of ___________.
a. P4,375 c. P2,500
b. P4,300 d. P0
Merchandising Business_A_M
2. Small Co. should debit Purchases of how much?
a. P58,125 c. P62,500
b. P58,200 d. P65,000
Merchandising Business_A_M
3. How much cash refund did Small receive?
a. P6,250 c. P11,750
b. P5,820 d. P0
Merchandising Business_A_M